Shareholders hold companies’ feet to fire

Shareholders are flexing their muscles, and corporate America should pay close attention.

Shareholders are flexing their muscles, and corporate America should pay close attention.
Shareholder activists reportedly have had enough and have made it known that they plan to confront executives and company directors when they deem that executives are overpaid. In addition, shareholders, in general, have made it clear they are dissatisfied with the misdeeds of company management, including stock options backdating and assorted accounting issues.
A shareholder revolt last month resulted in the ouster of the chief executive and several board members of beleaguered video game publisher Take-Two Interactive Software Inc. of New York.
The revolt was led by four institutional shareholders that were dissatisfied with management.
In February, The Home Depot Inc.’s board, reacting to an outcry from shareholders over the hundreds of millions lavished on former chief executive Robert Nardelli, constructed a watered-down compensation package for his replacement.
During Mr. Nardelli’s six-year tenure, for which he was paid $225 million, Atlanta-based Home Depot’s stock consistently had lackluster performance, while the share price of its main competitor, Lowe’s Cos. Inc. of Mooresville, N.C., shot up 178%.
Home Depot shareholders rightfully were outraged that he continued to profit handsomely, while they did not.
The right moves
Needing to find a way to appease Home Depot’s shareholders, the board demonstrated that it actually could make the right moves to control the excessive executive compensation.
Meanwhile, Citigroup Inc.’s chairman and chief executive, Charles Prince, last week faced off with shareholders in what turned out to be a three-hour marathon annual meeting at New York’s Carnegie Hall. One by one, shareholders hammered him with questions, according to published reports.
It has been well documented that the Citigroup shareholder complaints at the meeting were the latest evidence of underlying frustration with the New York-based financial services giant and its long-stagnant stock price.
The fact is that Citigroup’s shares hardly moved last year until December, when rumors were swirling about an imminent management shake-up, driving the company’s stock to a 13% gain for the year.
Some shareholders who attended last week’s meeting apparently have questioned whether Mr. Prince actually has the operational skill set to cut costs and increase revenue, according to some industry insiders.
Reportedly, at the meeting, he patiently responded to each shareholder question and was very careful not to cut anyone off.
“It’s obviously not the most efficient way to have interactions with your shareholders, but it’s important to be open,” Mr. Prince was quoted saying in published reports.
Clearly, there is a need for corporate executives to be open with investors. Shareholders have become disenchanted with the companies in which they entrust their hard-earned money.
Breath of fresh air
Therefore, an open and honest interaction from the head honchos would be a breath of fresh air for shareholder activists.
Of course, the timing wasn’t great for Citigroup, because its annual meeting took place just days after the firm announced a major cost-cutting plan that required the largest one-time layoff — 17,000 jobs — by a single company in Wall Street’s history.
During last week’s shareholder meeting, Mr. Prince pledged a much tighter grip on controlling costs.
That statement is welcome in light of the fact that the announced cost-cutting efforts came after he was awarded a $26 million pay package for 2006. Mr. Prince received a 12% raise in a year in which company expenses increased 15%, and revenue rose by 9%.
His compensation package included a $13.2 million cash bonus, which was up from $12 million in 2005, and $10.6 million worth of stock awards, compared with the $9.7 million figure in 2005.
Hopefully, Citigroup’s “much tighter grip on controlling costs” will include executive compensation.
Be careful, corporate America: Shareholders are watching, and they want answers.